Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the phone is not first quarter fiscal 2020 earnings conference call. At this time all participants are in a listen only mode. After the speakers precipitation there will be a question and answer session to Africa.
Question. During this session you need to press star one on your telephone please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Ms. Mcglothin. Thank you. Please go ahead.
Thank you good afternoon, and welcome to someone else first quarter fiscal 2020 earnings conference call.
I'm Cammeron Mclaughlin and with me today are so no CEO, Patrick sense and CFO Britney badly.
Joining the call early today and hold music comes from a playlist that is included in our shareholder letter. It was created by our blankets Ono complaint Research group resource group to celebrate black history month.
Before I hand, it over to Patrick I would like to remind everyone that today's discussion will include forward looking statements regarding future events in future financial performance. These statements reflect our views as of today and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results could differ materially.
Expectations reflected in the forward looking statement a discussion of these risk factors is fully detailed under the caption risk factors in our filings with the FCC. During this call. We will also refer to several non-GAAP financial measures, including gross margin in adjusted EBITDA, excluding the impact of terror adjusted EBITDA, adjusted EBITDA margin and free cash flow.
For a complete information regarding our non-GAAP financial information and a reconciliation of those measures. Please refer to the days shareholder letter regarding our first quarter fiscal 2020 results posted to the Investor Relations portion of our website I'll now turn the call over the Patrick Thanks, Cameron and Hello, everyone.
New fiscal year is off to a great start.
For the quarter increased 13% or 15% constant currency basis.
Record 562.1 million.
Excluding the impact of terrorists during the quarter gross margin increased to 44%.
Adjusted EBITDA increased 29% to 113 million and adjusted EBITDA margin increased to 20.1%.
Revenue growth during the quarter was driven by Arsenault speaker and so no system products led by move one SL amp and port a.
A record number of new homes started with Sonos during the first quarter and we continued to see strong growth in product registrations by both existing and new customers.
Alright, good partnership continues to be a strong contributor to growth in partner product and other revenue during the quarter.
Furthermore, importantly, we continue to see that consumers, who purchase sonos Ikea product to some phonics product are returning and repurchasing additional products and continue to follow the same repurchase trend as customers, who started with Suntrust products. This trend is important as we consider lifetime value of these customers and consider future opportunities in this partner space.
Yes.
Our products consistently rank among the top home audio products and we continue to gain market share amidst a rapidly evolving competitive environment.
During the December quarter, we increased market share dollars in the audio speaker category in many geographies, including the United States, United Kingdom and Germany.
When looking more specifically a premium price points into categories. We serve in the U.S. centers gained disproportionately more share compared to the rest of the market further illustrating the power and premium nature of our brand and the strength of our products and platform.
We are very strong holiday selling period led by growth across all product categories.
You know we limit regular promotions keep our campaigns view and targeted throughout the year and believe strongly and maintaining our premium position.
We plan, our marketing efforts to be deeper and broader this holiday as compared to last year, given how the holiday selling environment has involved our communication and targeting with more effective than ever.
Despite competitors offering significant discounts during the holiday season, we gained share, which we believe underscores the quality of our products the uniqueness of our platform and the strength and premium positioning of our brand.
Given our strong execution in Q1, an exciting product pipeline, we remain on track to achieve the financial targets, we set out for fiscal 2020.
We intend to continue our cadence of watching at least two new products every year and we are increasing we thinking about our products as more than hardware and look forward to being able to include additional business models as part of our future launches I will now turn it over to Brittany to say a few words.
Thank you Patrick let me add some additional color on our strong first quarter results.
Revenue growth was driven by strength across all product categories with the largest contribution coming from arsenault speakers and our partner products and other revenue.
Our planned promotions outperformed our expectations and we believe resulted in some pull forward of revenue from the second quarter.
As we discussed with you last quarter, starting this quarter. We are now reporting our revenue in the following three categories.
So no speakers, which increased 7% include play one place five so knows one SL play bar play based sub and our voice enabled so knows one move NB products.
So no system products up 17% year over year include Sonus port Amp, and boost and our partner products and other revenue, which increased 333% includes revenue generated through our qia and Sony its partnership.
Accessories and other revenue.
You will find our historical product revenue based on these new categories in the reports and filings section of our Investor Relations website.
Gross margin increased a 120 basis points to 40.5% during the quarter.
Excluding the 20 million in China, U.S. tariff duties recognized this quarter gross margin would have increased over 460 basis points to 44%.
Our strong gross margin expansion during the quarter was driven by volume and mix shifts into higher margin products as well as material cost reduction.
As we discussed last quarter, we continue to invest in the business to support our long term growth.
This spend is predominantly showing up in R&D to support our product roadmap software capabilities and services.
Our adjusted EBITDA for the quarter was 93.2 million compared to 87.4 million last year.
Excluding the impact of tariff adjusted EBITDA increased 29% to 113 million with adjusted EBITDA margin, increasing 246 basis points to 20.1%.
Turning to our balance sheet and cash flow, we ended the quarter with 408 million in cash and cash equivalents and 23 million in long term debt.
We generated over 100 million of free cash flow in the quarter.
We also completed the acquisition of Snips for approximately 36 million in cash.
In September 2019, our board authorized a $50 million share repurchase program, which we started to execute on during the quarter and we continue to see tremendous value in our stock.
The strength of our balance sheet enabled us to take a thoughtful approach to capital allocation. As a reminder, we are investing in our long term road map through R&D well also looking at inorganic growth opportunities as we demonstrated with snips.
We're also focused on returning value to shareholders through share repurchases.
We will continue to manage these each quarter, while also maintaining a strong balance sheet.
Looking ahead, we are excited for continued execution on a strong fiscal 2020.
We have great products and partnerships, including those launched at the end of 2019 and look forward to additional new products and services that we will announce this year.
We are pleased to reconfirm, our fiscal 2020 guidance.
We continue to expect revenue in the range of 1.365 to 1.4 billion.
This represents growth of 8% to 11% for the year and at the midpoint is consistent with our average annual target of 10% revenue growth.
We had a strong first quarter, but do believe there was some pull forward of revenue from the second quarter, given the effectiveness of our promotions, which is reflected in this guidance.
As a reminder, our gross margin and adjusted EBITDA guidance takes into account approximately 30 million of onetime impact from China tariffs.
So now its products manufactured in China and shipped to the U.S. were subject to a 15% tariff through February 13th and after that date will be subject to 7.5% Tara.
Given that the first quarter is our largest corridor and we have already begun transitioning to Malaysia. The reduction in the tariff is expected to have little impact on our fiscal 2020 tariff expense.
We expect Malaysia to be fully operational by the ended the year and therefore will have largely eliminated the impact of tariff by the end of the fiscal year regardless of rate.
We are also closely monitoring developments related to the Corona virus and are focused on supporting our people and partners. During this challenging time.
Currently we think any impact to our operations is minimal and at this time do not anticipate any impacts to our fiscal 2020 outlook.
Our fiscal 2020, GAAP gross margin outlook remains in the range of 41.2% to 42.2% excluding tariff related costs.
GAAP gross margin would be in the range of 43.2% to 44.2% in fiscal 2020, representing 140 240 basis point improvement from fiscal 2019.
Fiscal 2020, adjusted EBITDA means in the range of 72 to 82 million, including tariff.
Excluding tariffs, which we view as onetime adjusted EBITDA would be 102 to 112 million representing growth at the midpoint inline with our average annual 20% target.
We look forward to continued execution and believe we are on track to deliver our fourth consecutive year, a strong revenue and adjusted profitability growth.
We're very proud of the Q1 results, we have been able to deliver.
And with that we will open the line for questions.
As a reminder to ask a question you need to press star one on your telephone to withdraw your question press the pound key please standby, while we compiled the Q and a roster.
First question final Rod Hall with Goldman Sachs.
Hi, This is RK on behalf of fraud. Thanks for taking my question.
How do you know those pull forward from promotions.
Mr just better demand.
Could you all to quantify the magnitude of looking forward.
We're not going to quantify the magnitude of the pull forward, but if you look at the fact that we're maintaining our full year guidance, we have fully factored in what we think is pull forward.
And how do you know, it's not just better demand.
We look at a variety of factors and have conversations with our partners and look at sort of demand signals in the channel and our giving you our best view based on the information we have.
Okay.
Could you talk about what you mean by thinking about your products us more than just hard veteran including additional business models.
Yes, Hey, RK its Patrick here.
You know I think you began to get an appreciation for the kind of things we're thinking about based on a couple of experiments that we were running.
Over the last quarter something called so networks that we are running in the Netherlands, where you could bundle.
Certain sets of our products into a monthly fee that you pay which better reflects really what we do as a business because we're always bringing ongoing value to the customer in terms of new features and functions through our software. So we've been experimenting with Dod and.
So stay tuned on that one we've also started something called Sonus for business, where we think there's great opportunity to bring all the pillars of so knows the simplicity the great sound the freedom of choice to business customers as well.
So weve begun some experiments there and we've really as you've seen in our R&D investments we've been ramping up we believe there's opportunity to bring new experiences to send us customers and get us into new centers customers by looking at other opportunities to bring services to the platform and so you know just like we do.
With our hardware products as those are ready and ready for scaling and public consumption will be talking a lot more about those but.
I'm very proud of the fact that the team is looking at and spending time, not just on where we've been traditionally but also thinking beyond that and thinking in air new areas, where sent us can go.
That makes sense. Thanks for all the color just one final question from me.
You want on last month that you're not going to provide software updates to some older products could you talk about how that impacts replacement rates.
The initial customer reaction has been.
Sure.
That is something that I think we certainly saw how passionate are sent us customers are from any communication and what that the news that we put out there I mean, we didn't get a right in terms of our initial communication, hence my follow up and so I think everybody understands now that.
The intent was to talk about the fact, our products launched anywhere from 10 to 15 years ago are no longer capable of supporting the new features that are going to be coming out in may but they will continue to be supported with bug fixes and software updates and those kind of things that we see that continuing into the future. So.
I would say, we've got lots of comments I got lots of emails.
And I would say that was probably 70% to 80% of kind of the volume in terms of people asking about that and most are reassured in terms of the message there, but you know I think we.
I think we're we've we've always stood for product longevity.
It's very different than anybody else in the industry and we plan to continue to lead and product longevity.
Right now we think that there we've introduced the trade up program, which helps our longtime customers be able to move into the latest and greatest products. So that's something we've just started we're starting to learn from that so we'll see how that impacts.
But you know replacement rate over time as we go through that but weve at this point, we've been just learning in terms of going through that.
And we continue to expect that we'll see similar kind of repurchase rates from existing customers as well.
Great. Thanks, Congrats on the go to those guys.
Thanks, Okay.
Your next question on line of Adam Tindle with Raymond James.
Okay. Thanks, good afternoon.
I just wanted to start on revenue guidance, obviously, congrats very strong December quarter, just hoping on what you.
Can touch on a little bit on what you're seeing here early in the March quarter, given the commentary around the Poland I am just anticipating some debate tomorrow on one hand, we could fully understand not wanting to model normal seasonality off a strong quarter due to prudence and conservatism on the other hand.
So you can sympathize with the fact that this is the quarter last year, where there was a channel inventory problem that needed to be corrected I think theres. Some speculation that that could be bubbling up again. So just hoping that you can help us understand conservatism versus channel inventory issue based on what you've seen thus far in the March quarter.
Yeah, I think we're comfortable with our inventory position in terms of where we are and you are obvious we're very happy with our Q1 results and we're not changing our guidance for the year in any way. So I think thats sort of the best color I can give in terms of how we're seeing Q2.
Okay, and maybe just on that point cash flow was up nearly 30% year over year. Despite the incremental tariff impact can you just touch on what's driving strong trends and cash flow and how we can think about casual as the year progressive.
Yes, Q1 is always our strongest cash flow quarter, we have incredible benefits of scale in Q1 that said, we also had strong working capital management and of course, because we're really not a taxpayer yet we had another great quarter, where our free cash flow was actually higher than our EBITDA.
So that are those are some of the contributing factors.
I think if you looked last year Q1 would also have been our highest cash flow quarter and so I think you can think about similar trends throughout the year.
Okay, and one quick one for Patrick.
It looks like you're keeping the EBITDA guidance, which for the year, which would imply a net loss for the remaining three quarters of the fiscal year, which is pretty atypical best based on the past few years, usually a couple of million positive.
And you mentioned investments and that's what I wanted to ask about if you could just maybe touch a little further on the investments that you mentioned and ultimately.
Got you comfortable with making them and what you expect to see from them.
Yeah I'll take this one Adam.
I think what we are really doing as you have seen even starting in the second half of 2019 and then what we are expecting through this year is that we're making pretty significant investments predominantly in our R&D and product organization. This is to continue to support our long term product road map.
Our diversification outside of the home Patrick spend a little bit of time to on how to think about our new potential revenue initiatives that we have been experimenting with and so we really see this as an important investment for our long term future and the overall strength of the business.
For many years to come.
Obviously, we are trying to balance that along with strong gross margins this quarter and continuing to deliver on our promise on an average annual 20% EBITDA growth. So we really are balancing the investments, we're making with the overall health of the business, but feel really good about the opportunities in front of.
No no says the company and where we can take it and the fact that we really are leaders in our products both on the hardware and software side of the business.
Okay, Thanks, and congrats on the strong start.
Thank you.
Your next question on line of Kathy Harper with Morgan Stanley.
Yes. Thank you my congrats on the quarter as well Britney as you think about Twoq historically.
Revenue was down 50% to 60% sequentially.
Should we think about a trend that is in there that range, but maybe towards the high end of of the decline historically given the pull in or is there a scenario where.
Revenue in Twoq you this down year is down more than we've seen in the past.
Yeah, I mean, I know I don't think we're going to start giving real quarterly guidance or shaping the quarters. So the best I can do is is to advise looking at last year as as a guide and then taking into account our comments about Poland.
Okay. Thank you and then.
You mentioned as it relates to gross margin dynamics up 140 to 240.
Basis points margin expansion and some of that is product mix can you talk about what is the mix shift that's going on in the business that is allowing you to expand gross margins at that rate.
Yeah, I think that all of our different product have different gross margins associated with them and so there is variability for us in any given quarter in terms of how that mix will fall out from a gross margin standpoint, so I would say in Q.
One we happen to sell a lot more of our high margin products. You can look at where we were running promotions and think about how that probably contributed to it.
Then it's really that and then some continued improvement in our material costs, which led to very nice quarter.
Okay, and then just one last one maybe for Patrick you talk about in the Investor letter the idea of realizing the value of your IP and that May mean patent licensing or other accretive financial arrangements can you talk about how many of those type of arrangements you have in place today and do you see this is.
A year, where there could be an inflection in the number of those arrangements. Thanks.
Hey, giddy it it's Patrick I get a pass you to Eddie.
Our general counsel and lead on IP to answer that one.
Hi, everyone. Thanks, Patrick.
So.
As a as we've noted we think that quite a few players in the space are currently infringing on our patented inventions.
And were in.
Discussions with.
Many of those companies, we hope that those discussions will bear fruit and nut.
Substantially accretive way.
Exactly when thats going to happen, we can't say.
We we view this is really a long term proposition for the company, it's not something that we have a clock on but.
As we've shown now we're also willing to litigate when necessary IPH discussions completely breakdown.
So.
For us it's.
Every every single one of these circumstances is a little bit different and I wouldn't want a pre judge where we're going to come out, but we are very.
Actively pursuing getting value for what we consider to be extremely valuable adventures.
Any do you have existing licensing arrangements in Britain, where does that show up in the in the revenue segmentation I assume in other.
Yes that would be in our other category.
Thank you.
Your next question why not met sharing with Stifel.
Yes, Thank you and thanks for taking the question.
Regarding the.
Promotional activity are you had in the quarter sounds like that's been very successful and as you look through the fiscal year not just the seasonally strong quarters.
How is that strategy change in terms of reaching out to customers and what should we expect that through the year.
Yeah, I think you should really expect that we continue to be a premium brand and that we are very selective in terms of when we run promotions and that we are looking at it holistically.
But what we have seen from Black Friday cyber Monday is that that is increasingly promotional time of year and customers really expect that companies are getting promotional we we're by no means the most promotional company and our category on Black Friday Cyber Monday.
But you know to some extent you really have to make sure that you're ready to play and show up at that time of year and so what you saw from US. This year was that we plan to that that we went a bit deeper this year than we did last year and that really paid off for us as a result.
I think we'll see what that means next year, we're not going to get into 21 at this point, but for the rest of 20.
Everything is already planned into our guidance and we will be continuing to focus on being a premium brand and very selective in our promotions.
Okay, and you mentioned Patrick that you saw a nice increasing the number of of registered users could you tell us what that number was and then in terms of the.
The.
The percentage of customers that buy digital products, particularly with this ikea.
Program could you give us that number as well.
Yes, we give those on annual basis. So we were not providing any on the quarter, but it was a record quarter in terms of the number of new homes. The other thing that was important was Ikea was a significant contributor to that so our push for partnerships and the work that we've done there.
Which again is very different from where we've been in the past has been something thats really helping expand the sonos system in the software platform into new many many new homes and so.
That's something which we're very proud of and we think has a lot of opportunity for the future.
Got it okay. Thank you.
And your next question might have Thomas Forte with D.A. Davidson.
Great. Thanks for taking my question. So as you move your supply chain into Malaysia for products sold in the U.S., how should we think about the potential for your supply chain that stays in China as far as potential disruption disruption from a prolonged.
Grown a virus. Thank you.
Hey, Thanks for the question look at Corona virus is obviously, a very fluid situation. So it is hard for us to predict with certainty what the impact is going to be there, but for what we see now based on the information that we do have we are saying there will be minute.
I will impact and no change to our fiscal year 2000 guidance.
The only thing I went out on that is just that tried also isn't material market for us. So I know many companies about talking about this but I think it's important to note that from a revenue perspective, it's not material for us on us.
Great. Thanks for taking my question.
Thanks, Tom Thank you.
Your next question line of Robert Muller with RBC capital markets.
Hi, can you talk a little bit about the integration of the snips team on how the development of voice assistance is coming along.
Are there any kind of targets or goals that you're you're looking towards in terms of when we actually you might see integration into any products.
You know the integration is going well.
And we're excited by it I think we found the people that share a lot of the.
Believes that we have in terms of how to build amazing customer experiences and I would say stay tuned in terms of the rest.
Yeah, let's say you're going to see them fully integrated in our piano, so you're not going to see any call outs related to the snipped acquisition and likely do with everything on our product roadmap. When we're ready to announce something will be really excited to share it with everyone, but we're not putting out timelines on specific product features.
Sure and then just I know, it's small but on tariffs can you expand just a little bit more on why there wasn't a reduction to your expectation I mean, just kind of backed envelope math seems like maybe a few million at least.
I'm just wondering why the have another rate is not changing your expectations.
It is really because of how much of the tariff came through for us in Q1, which is well behind by the transition timeline and then you know we are already in production in Malaysia. So we moved very quickly on that and are executing there and so as we talked about last.
Quarter, our tariff impact as really front end weighted for the year and so as we get into the back half of the year, we had largely mitigated that and that's why you really don't see a material call out for the reduction in the tariff rate.
Okay. Appreciate it thank you.
Thanks.
Your next question, Brent Ti Hill with Jefferies.
Thanks, Patrick you mentioned that strong growth in Americas.
It was only up 1% constant currency I'm just curious what you think the cause was in what kind of gets that back elevated to where you see the U.S. level that.
Yeah, I think the.
I think the important thing to understand there that we referenced a little bit is what's going on in the market as well you know and we were able to actually gained share in the key markets there in UK and Germany, and so we feel good about the work that we're doing there as well and with some of the work that we're doing with Ikea I think.
In an excellent position.
And so we you know, we obviously want to see that.
We continue to grow over time, but at the same time, we feel good about our positioning and being a premium brand like in the categories. We plan. We're in we're in a good position.
In that market.
And I know you know that the your email about the software updates maybe center on signal, but I've, just anecdotally had some friends and they've already.
Moved to to upgrade it get moving it have you seen any upgrade how did that that that you see already in the system or or is that.
This is just too early to call.
The the program that we offered as a choice right to customers. The again this is a choice to customers and so they get too if they choose to upgrade because they're excited by the features and functions that are there. They can choose to do is really just got started at this particular point in time so.
Too early at this point to see this is the first time you know in what Citic 16, 17 years now we've gone through or anything like this so we'll learn and be factoring that in but but right. Now. It's early in terms of going through that and I think you know we we also clarified that message pretty quickly so people understood that their existing products.
Continue to work so I think the.
You know again this is while I understand the questions from like a revenue perspective, and how it impacts the flow. It really is an effort to make sure that we're building on the brand that we've created and that customer loyalty and everything that we're doing for customers.
So will you know, we'll see over time, how that trends.
Yes, the only thing I would add as as you can imagine we didnt make this decision lately or quickly and so to the best that we can estimate these impacts. They are included in our fiscal year 20 guidance.
Great. Thank you.
And turning back over to Patrick expense for closing remarks.
Great well. Thank you everybody, we're very excited with the strong start to fiscal 20.
And are looking forward to an exciting year as you can see we're making a lot of investments.
Primarily in research and development and so we're excited for what lies ahead.
And thank you for your support.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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